Impact of Reengineering
If all articles were submitted and distributed electronically, I would guess that the costs of the editorial process would drop by a factor of 50% due to the reduction in clerical labor costs, postage, photocopying, and so on. Such costs comprise about half the first-copy costs, so this savings would be noteworthy for small journals. (See Appendix A for the cost breakdown of a small mathematics journal.)
Once the manuscript was accepted for publication, it would still have to be copyedited and converted to a uniform style. In most academic publishing, copy editing is rather light, but there are exceptions. Conversion to a uniform style is still rather expensive because of the idiosyncrasies of authors' word processing systems and writing habits.
It is possible that journals could distribute electronic style sheets that would help authors achieve a uniform style, but experience thus far has not given great reason for optimism on this front. Journals that accept electronic submissions report significant costs in conversion to a uniform style.
One question that should be taken seriously is whether these conversion costs for uniform style are worth it. Typesetting costs are about $15 to $25 per page for
moderately technical material. Markup costs probably require two to three hours of a copyeditor's time. These figures mean that preparation costs for a 20-page article are on the order of $500. If a hundred people read the article, is the uniform style worth $5 apiece to them? Or, more to the point, if 10 people read the article, is the uniform style worth $50 apiece?
The advent of desktop publishing dramatically reduced the cost of small-scale publication. But it is not obvious that the average quality of published documents went up. The earlier movement from hard type to digital typography had the same impact. As Knuth  observes, digitally typeset documents cost less but had lower quality than did documents set manually.
My own guess about this benefit-cost trade-off is that the quality from professional formatted documents isn't worth the cost for material that is only read by small numbers of individuals. The larger the audience, the more beneficial and cost-effective formatting becomes. I suggest a two-tiered approach: articles that are formatted by authors are published very inexpensively. Of these, the "classics" can be "reprinted" in professionally designed formats.
A further issue arises in some subjects. Author-formatted documents may be adequate for reading, but they are not adequate for archiving. It is very useful to be able to search and manipulate subcomponents of an article, such as abstracts and references. This archiving capability means that the article must be formatted in such a way that these subcomponents can be identified. Standardized Generalized Markup Language (SGML) allows for such formatting, but it is rather unlikely that it could be implemented by most authors, at least using tools available today.
The benefits from structured markup are significant, but markup is also quite costly, so the benefit-cost trade-off is far from clear. I return to this point below.
In summary, reengineering the manuscript-handling process by moving to electronic submission and review may save close to half of the first-copy costs of journal production. If we take the $2,000 first-copy costs per article as representative, we can move the first-copy costs to about $1,000. Shifting the formatting responsibility to authors would reduce quality, but would also save even more on first-copy costs. For journals with small readership, this trade-off may be worth it. Indeed, many humanities journals have moved to on-line publication for reasons of reduced cost.
Odlyzko  estimates that the cost of Ginsparg's  electronic preprint server is between $5 and $75 per paper. These papers are formatted entirely by the authors (mostly using TE X) and are not refereed. Creation and electronic distribution of scholarly work can be very inexpensive; you have to wonder whether the value added by traditional publishing practices is really worth it.